Notable Calls

Tuesday, February 19, 2013

J.P. Morgan Metals king Michael Gambardella is making a major call in Cliffs Natural Resources (NYSE:CLF) this morning upgrading the iron ore miner to Overweight from Neutral with a $40 price target (prev. $35).

- Since mid-September 2012, Cliffs’ peer group is up 17% on average while CLF is down 37% despite a 53% rise in seaborne spot iron ore prices – the current discount between Cliffs’ stock price and iron ore prices is now at the widest spread on record.

Gambardella attributes this substantial relative underperformance to persistent disappointments at Bloom Lake presented to the market piecemeal over the last two years, ultimately culminating in a 20% writedown on the initial $5B purchase price, a threefold increase in Phase II capex, and a 76% dividend cut. Additionally, the recent capital raise diluted shareholders by 15-17% but reinforced Cliffs’ balance sheet to endure future commodity volatility and possibly fund future growth projects.

In his view, Cliffs’ shares reflect this series of negative events and are only pricing in $110/tonne iron ore in 2015, 29% lower than current spot prices, based on the stock’s average EV/EBITDA multiple of 5.6x. Gambardella believes the stock’s reduced sensitivity to rising iron ore prices post 3Q12 earnings and the historically wide gap versus spot seaborne indices should dampen any potential downside if the recent run loses momentum following the end of the Chinese New Year. In his opinion, management has reset Bloom Lake’s expectations to an achievable level and given sentiment appears apathetic at best (9% buys after three recent cuts to neutral/hold) he believes merely meeting guidance at the key project will be enough for Cliffs to begin climbing over a large wall of worry. As this process unfolds Gambardella sees the market re-rating CLF’s valuation higher for its renewed leverage to iron ore prices, which he believes have a positively skewed risk profile in the medium term.

In his opinion, 2015 seaborne iron ore prices have more potential upside price risk in the medium term than reflected in forecasts by J.P. Morgan’s commodity team or consensus estimates.

Some of the more interesting details from the call:- Execution on Bloom Lake key to stock appreciation... We believe the stock’s muted correlation with robust iron ore fundamentals and record discount to current prices suggest this former prime driver will take a back seat to results delivered by management relative to the new Bloom Lake plan. In our view, Cliffs has likely reset the bar to an achievable level in 2013 after the recent streak of poor performance and a 20% write-down of the initial purchase price perpetually disappointed investors. Given this poor track record, merely meeting the new guidance could be enough to boost sentiment and the share price; we would note the first phase at Bloom Lake exited the year on track with its stand-alone 2013 target.

- … and re-establishing leverage to seaborne prices. We expect Cliffs’ leverage to seaborne prices will gradually increase over the next three years with the addition of Bloom Lake Phase II and long term USIO contracts rolling over into shorter, spot centric agreements. Assuming management delivers Phase II on time and budget, CLF’s valuation should re-link to iron ore prices, which we believe could ultimately remain higher for longer than consensus and our internal commodity team expect.

- Potential value outside of Bloom Lake. Although Cliffs declared the project is the future of the company, we believe management is also in the process of unlocking value in several other areas. We estimate Cliffs could net EBITDA improvements of 10% and 11% versus our 2013 and 2014 forecasts if Wabush operations break-even ahead of our current 2015 timeline. Separately, we believe management could conservatively monetize the estimated $500mm spent on purchasing the chromite properties and bringing the project to feasibility by taking on a partner or selling the stake outright. Additionally, we expect the company will take steps to mitigate material contract expirations at USIO by developing and marketing DRI pellets while potentially expanding its optionality to export more than its estimated current limit of 2mm tonnes of pellets annually.

- We would note holding the current $155.10/tonne iron ore price in 2015 yields a $75 price target utilizing the stock’s long term average EV/EBITDA multiple of 5.6x, 160% above the current stock price.Notablecalls: Actionable Call Alert!

- Gambo is the Axe in the space. He downgraded CLF back in Sept '12 - 15 pts higher. One of the few analysts that can actually time the market.

- Gambo notes management has reset Bloom Lake’s expectations to an achievable level. Remember this guy has a very good management bullshit detector. Molycorp anyone? So if he says Bloom Lake is good, it's likely good. At it's mostly about Bloom Lake right now.

- It's an out-of-consensus call as Gambo himself notes. There are very few Buy-rated analysts out there. Shorting CLF has been the hip trade. Chart looks awful and I suspect everyone and their mother has been expecting a downside break. Short intrest stands around 20%. They could be in for a nasty surprise if Gambo is right.

- Note Gambo is going against JPM commodities team and Consensus on iron ore pricing. He thinks there's more upside.

- If he is right on iron ore pricing, CLF is a $75/share stock vs. ~$30/share today.All in all, this call has potential to propel the stock back above the $30 mark and likely closer to $31 today. I say +7%.

- They believe Blackberry should trade in the $20-25 range once a decent launch for Blackberry 10 and a stabilised trajectory for FY2014 are priced in.

Bernstein upgrades Blackberry to outperform today as they believe BB10 is set for a strong launch. Even if the long term prospects for the platform are very uncertain, the firm believes all is in place for Blackberry 10 to enjoy a great debut. They see four reasons to model a launch well above current expectations.

1 - Blackberry has drained channel inventories over the last 12 months and is in a very strong position to start shipping its new devices. Channel inventories came down by over 10m units over the last 12 months, which means most distributors and operators will take on significant initial orders (Exhibit 1)

2 – Blackberry 10 will propel up device gross margins. Bernstein believes the company currently sells high end devices at negative gross margins. As these devices are replaced by positive margin Blackberry 10 ones, Blackberry’s P&L should swing back into the black in 1QF14. They are at this stage convinced initial Blackberry 10 shipments will carry gross margins in the region of 30%.

3 - The Blackberry 10 launch is supported by most operators. In their recent discussions with operators the firm noted a very broad support, with operators willing to give the platform a good push.

4 – Initial Corporate demand will be strong. Bernstein recognises rapid share losses for blackberry in corporate, as "Bring Your Own Device" becomes the norm, but the brand still benefits from a significant user base equipped with ageing smartphones. They have anecdotal evidence that a number of corporate clients have been waiting for Blackberry 10 to refresh their installed base, which will support shipments meaningfully in the first months of the launch. If only 10% of Blackberry’s 30m corporate users refresh their phone within the first 6 months of the launch, this would represent ~3m units alone.

The strength of this launch is overlooked by investors, creating strong opportunity to buy Blackberry.

- Bernstein conservatively expects shipment of 1m units for January and February, in the current quarter, and thereafter 1m units per month in March to May, generating 3m units of BB10 sales in the first fiscal quarter of 2014. As a reference, the current sell through run rate of Blackberry is close to 3m units a month.

- They assume ~$550 ASP and 30% gross margins for BB10 devices, which is in line with communicated selling prices and their channel checks. This would drive gross profits 24% above current expectations for 4QF13, 32% above expectations for 1QF14.

There is no bear case related to the evolution of Service revenues.

- For the last two years, Blackberry's service revenues have remained stable, in the region of $1bn a quarter, driven by a stabilising user base and resilient ARPU.

- It is well understood that the migration to Blackberry 10 will create some pressure on Service revenues, most likely for some consumer segments. Bernstein models an average service revenue per BB10 user 50% below the current average. On that basis they see two potential scenarios, and the stock working well for both!- Either Blackberry 10 is a slow launch, driving limited upside. In that case, older contracts will continue to form the vast majority of Blackberry’s user base. Blackberry will continue to benefit from the service revenue cushion. In that scenario, Blackberry’s business model is much more resilient than consensus expectations imply.

- Or Blackberry 10 is a success, and in that case, there is a risk that service revenues come under meaningful pressure. The irony is that if Blackberry 10 is a success, some pressure on Service revenues would be the least of Bernstein's concerns and more than compensated by a recovery in the device business.

Notablecalls: Ferragu has been a major bear in Blackberry since '10 with a couple of stints on the Market Perform side along the way. Now he is making a rather significant call saying the stock should trade ~100% higher. This will not go unnoticed.

His views regarding the Services side potentially ending in a win-win situation are also quite interesting and should work to calm investor fears.

With the stock down 5 pts from the $18+ highs I suspect a strong case for a long trade can be made here. Potential 10%+ move in the cards.

Tuesday, January 22, 2013

Following the scathing downgrade from Jefferies on Friday Finisar (NASDAQ:FNSR) is getting some supportive comments from Needham's Networking team.

- Overreaction to “Silicon Photonics” fears—they think hype and innuendo drive fears more than technical merits do.It appears that Silicon Photonics advances from Intel are being used to imply co’s CPAK is a threat to Finisar. Needham strongly disagrees. They do not see CPAK as superior to Finisar’s current or future technology. Firm points out that Intel’s technology is applicable to very short PCI Bus architectures and has tightly constrained distance limitations. The physical limitations of silicon, lasers and composite chips limit Intel’s design to very short distances for connectivity within a single rack where optics are not used. It is replacing copper in a rack, and is not replacing any Finisar offerings.

Cisco’s CPAK CMOS technology cannot scale down—as monolithic designs are shipped they believe Finisar can deliver lower power, tighter density and lower costs than CPAK. First generation CPF LR4 100G devices are not yet monolithic. As the more integrated versions ship, Needham expects them to easily surpass Cisco’s CPAK CMOS Silicon Photonics offerings even before they ship. This is simply not a threat to Finisar, in firm's opinion.

Reiterate Buy—Silicon Photonics not a threat. FUD (fear, uncertainty, doubt) is a problem and the technology is difficult to explain, but it won’t impact revenues and profits, Needham says. Reiterates their Buy rating and $18 price target.

Friday, January 18, 2013

Jefferies & Co analyst James Kisner is making a major negative call on Finisar (NASDAQ:FNSR) downgrading the optical module maker to Underperform from Hold with a Street low $7.50 price target (prev. $14.00).

- Checks with Intel suggest the they can now build 100G transceivers at “high volume” and with a “good yield”. Bad news for Finisar.

Investor Summary: Jeffco's checks and a recent public announcement from Intel suggest that the ultimate commercialization of highly deflationary silicon photonics technology in data centers is likely no longer in doubt – bad news for manufacturers of “traditional” MSA-based, manually assembled optical transceivers for the data center such as Finisar. They believe current Street expectations for Finisar in FY14 and FY15 are likely too high as they likely do not contemplate the impact of silicon photonics-based products on the 100G CFP market, of which Finisar may have as much as an 80% share. The business currently trades at 18x firm's new CY14 EPS estimate of $0.95, a premium to industry peer JDSU (which trades at ~14x CY14). Firm arrives at their new $7.50 target price (down from $14.00 previously) by applying an 8x P/E multiple to our CY14 EPS estimate – reasonable in their opinion given Finisar’s relatively lower medium-term growth profile. (They now expect revenue growth in the low to mid-single digits over the medium- to long-term.)

* Cisco and Others Are More Significant Near-Term Threat. While Jeffco suspects it will be a while before we see optical transceivers from Intel, their checks suggest a number of players, including Cisco, are likely to launch silicon photonics-based transceivers for 100G applications in the data center in 2013 and 2014.

* Finisar may now have as much as an 80% share of the 100G CFP market, and Jeffco estimates that 100G CFPs represent around 10% of Finisar’s business today. However, they would note that: 1) CFPs are currently among the highest margin, fastest growing products in Finisar’s Datacom Portfolio; 2) Conversations with industry contacts suggest that silicon photonics technology can scale to higher speeds (400Gbps and beyond) relatively easily – thus the broad adoption of silicon photonics technology puts the long-term growth prospects of Finisar’s datacom business in jeopardy.

* Acknowledge a Lot of UnknownsKisner acknowledges there remains significant uncertainty around timing, pricing, and breadth of customer adoption of silicon photonics technology. He also admits there may be lack visibility into various ways Finisar might participate in the deployment of this technology (including potential acquisitions). Nonetheless, on balance, he believes that the threat of silicon photonics is now tangible and skews the risk/reward offered by Finisar shares to the downside.

Notablecalls:This is a big fundamental call that will serve as a overhang for the foreseeable future. Having Intel and Cisco as competitors (with better tech!) simply can't be good. A structural problem that's not going to go away.

Kisner's no stranger to making big negative calls in the space. He downgraded Finisar back in Feb after Cisco announced the $300 mln Lightwire deal sending the stock down ~50% over the next 4-5 months.

With Kisner saying competition is now on the doorstep and slashing his estimates and target way below Consensus, this is going to generate ample fear and selling interest. Don't get me wrong - every FNSR watcher out there has been aware of the looming competition for quite a while but Kisner says it's coming earlier than many expected.

All in all, I suspect FNSR will be down 10%+ today and trade toward recent lows in the coming months. Don't chase it too low, let it come to you.

- Porges now convinced Provenge is not dead; Raises his estimates significantly; Sees $1+ EPS power by 2016 yielding significant upside for the stock.

The basis for his upgrade is the feedback he and his firm received from urologists in recent months as part of Bernstein's ongoing monitoring of the adoption of Medivation's Xtandi and its positioning against JNJ's Zytiga. That feedback, particularly from community urologists, convinces them that Provenge is not going to disappear, and in fact is more likely to return to modest but steady growth once the turbulence in the market (and the company) stabilizes. When the market (and industry observers) realizes that this is occurring, Porges expects the stock to offer significant upside given current low expectations.

Dendreon has been one of the worst performing stocks in biotech for the past two years, languishing between $4 and $5.50 since mid 2012 compared to prior highs of $40 to $45 in 2011. The last 18 months have seen the progressive disaster of poor forecasting, reimbursement challenges, slowing revenue growth, insider selling, excessive cash burn, shareholder class action suits, changes in management and board membership and finally restructuring. Most traditional healthcare and biotech investors have abandoned the company, and the stock now reflects a significant probability of extinction, in Bernstein's view. Investors have endorsed the dogma that the firm outlined in their coverage initiation a year and a half ago, which suggested that new prostate cancer drugs such as Zytiga and Xtandi will crowd out Provenge and gradually reduce its revenue opportunity, such that Dendreon fails to ever achieve sustained profitability.

- To explore the impact of these competing drugs, and how perceptions of Provenge are evolving, Bernstein recently conducted a series of one-on-one detailed phone interviews with urologists who are current users of Provenge – their thesis was that if Provenge is going to disappear, current users should be reducing their patient numbers now, or expecting to in the future.

When they contacted urologists with significant experience with Provenge, the firm found the opposite of these bleak expectations. The busiest urologist Provenge prescribers have been increasing their use, and recruiting colleagues and peers to use the product as well. These high volume users acknowledge some hiccoughs, but are adamant that they will recommend the drug to a significant and growing minority of advanced PC patients. Not only do they not expect any reduction in the frequency of use, but instead expect a 10-20% increase in the frequency of use in 2013, compared to 2012, and a further increase in 2014. These findings differ from Bernstein's prior research and other opinions about Provenge because they come from current users of Provenge; however, they are consistent with Dendreon's own comments and information (+15-25% sequential growth in urologists' use) from the last three quarterly conference calls.

- Based on these findings they are increasing their revenue forecast for Provenge; They now forecast peak revenue for Dendreon of $799mm by 2017, compared to $580mm previously with a significant contribution from ex US markets.

- They expect the company's cash expenses to now match revenue by mid 2013, and for the company to report full year positive earnings in 2014. Firm's adjusted EPS estimates are now for pro forma earnings of $0.17 in 2014, then $0.54 in 2015 and $1.14 in 2016. These are all significantly higher than recent consensus;

This call is consistent with Bernstein's more cautious stance about the higher quality mid cap biotech stocks toward the end of 2012. Porges believes there may be more opportunity in the disliked "out of favor" names (of which Dendreon is the poster child) than in chasing new highs for the recent sector leaders.

Given the cost and complexity of Provenge, Porges thinks Dendreon is unlikely to be a free standing company long term.

Notablecalls: There are several reasons why this is a big call and likely to have significant positive impact on the stock:

1) Porges is the probably the most respected analyst in the space; He is the Axe.

2) Dendreon has been left for dead by almost everyone except some die hard cult followers; Short interest stands at 30%.

3) Porges is now saying outright Provenge is going to survive and even thrive; His estimates are now way above Consensus.

4) EPS power of $1+ in '16 will yield in a $20-25/share stock = huge upside.

5) Porges is making a very sensible bet saying out-of-fav names are going to be the place to be in 2013. DNDN is the prime candidate.

6) This call is a huge surprise. I bet there are analysts out there today telling their associates to get on the effin phone and start talking to docs. If the feedback they are going to get is anything similar to what Porges recieved there are going to be more upgrades.

All in all, this call is likely to take the stock above $6/share today and toward $7 in a few weeks.

Ader is downgrading the shares of FIO from Outperform to Market Perform, based on his belief that Street consensus estimates for the second half of fiscal 2013 (March and June quarters) calling for year‐over‐year growth of 46% are aggressive. His checks point to slower‐than‐expected bookings, specifically on the enterprise side of the business (both for PCIe cards and standalone software), leading him to believe that the company will struggle to meet expectations for the full fiscal year.

Ader notes they continue to strongly believe that enterprise flash is at an inflection point, but demand for server‐attached PCIe cards appears to be developing more slowly than he expected, though he is still expecting FIO to grow its enterprise sales by 53% (down from his previous estimate of 66%) in fiscal 2013 (June). The analyst notes he is struggling to point his finger at why demand has slowed in recent months, but it is evident that macro pressures affecting the larger storage market are impacting the PCIe segment, resulting in less low‐hanging fruit being available. In addition, his checks suggest that Fusion’s software offerings (ioTurbine and ION) and recent OEM partnerships (with Cisco [CSCO $20.29; Market Perform] and NetApp [NTAP $33.24; Market Perform]), both of which he has viewed as key growth catalysts in fiscal 2013, are developing more slowly than he initially anticipated. Lastly, Ader believes that new emerging architectures such as all‐flash arrays may be causing customers to pause as they evaluate alternative approaches to flash and educate themselves on newer offerings.

From a competitive standpoint, while William Blair has not picked a material change in the PCIe flash landscape, firm's checks indicate that Intel (INTC $21.25) is gaining steam with its recently introduced Ramsdale 910 series PCIe card. The 910 is substantially less expensive (30‐40% cheaper by some accounts) than Fusion’s ioDrive 2 product line, and according to their sources performs better than Fusion in write‐intensive environments. They believe Fusion may soon introduce a lower‐priced PCIe card that will be more competitive with the Intel card, but their fear is that this new card could cannibalize ioDrive sales.

Notablecalls: This is a big call from Ader. He is pretty much calling Fusion-io the next Mellanox (MLNX) with the exception Intel is already here with a competing product. What's even worse Intel's Ramsdale 910 series PCIe card is 30-40% cheaper while performing better than Fusion-io's comparable offering. That's going to weigh on margins sooner or later.

We had the perma bulls from Credit Suisse out yesterday touting FIO's ioTurbine software as the main competitive edge. Here's what Ader has to say:

Monday, January 07, 2013

Canaccord's Jonathan Dorsheimer is making a very interesting call this morning downgrading Cree Inc. (NASDAQ:CREE) to Hold from Buy with a $32 price target (prev. $38)

- Dorsheimer believes that their thesis of GM expansion from the transition of legacy components to SC3 has largely played out and is reflected in the stock. He thinks Cree’s next phase of growth will be driven by its lighting systems business, not components, which may limit further GM expansion.

Canaccord is downgrading CREE shares on expectations of a slowing rate of GM expansion and lowering their estimates to reflect a more lighting systems-centric business model, which they do not feel is reflected in treet expectations.

With roughly 50% of components comprising SC3 technology, the firm believes the low-hanging fruit of the GM expansion story has been achieved.

They view the CREE story evolving to lighting from components, as evidenced by CREE’s 8-K on December 4, 2012, regarding CEO Chuck Swoboda’s compensation, which is now weighted more toward performance of the lighting segment.

Canaccord sees CREE entering a period of “investment” in order to stimulate the market and capture share, a strategy they agree with over the medium to long term. However, in the near term they feel this may lead to investor frustration, and with a softer demand environment it creates risk to the December and March quarters.

If this was just a seasonality call and a miss on the quarter they would not downgrade the stock, Canaccord notes. However, they see the business model shifting and would prefer a more attractive entry point before recommending the shares during this transition.

ValuationCanccord is lowering their price target to $32 from $38 previously, based off of a 15x multiple to their newly introduced C2014 EPS estimate plus cash per share. They have lowered their estimates to reflect lower component growth offset slightly by higher lighting systems growth. Within the segments the firm has tempered their expectations for GM expansion in components, but increased slightly GM assumptions for the lighting systems business.

Notablecalls: Dorsheimer seems to be making a solid out-of-consensus call here. Period of "investment" is probably not what the current holders want to see right now. Lighting systems carry a 30% GM vs. 40% for components.

Dorsheimer is lowering his '13 estimates below consensus and price target below current market price to prove his point.

All in all, this looks like a call that could turn even some long-term holders into sellers. Especially after the stocks' recent strong performance. I'm guessing below $33/share today and toward $30 level in the coming weeks.